About 60% of deals subject to similar inquiries since 2019 did not close, according to Timothy LaComb, a San Diego attorney specializing in antitrust, unfair competition, and complex business litigation, particularly regarding mergers and acquisitions.
Wednesday morning, the British Competition and Markets Authority CMA launched an in-depth, Phase 2 investigation into the $61 billion Broadcom-VMware merger after raising regulatory concerns last week about reduced competition in the hardware market from the chipmaker’s acquisition of the software company. The inquiry could take through Sept. 12 — a bit less than six months.
The CMA initially outlined its concerns last week, giving Broadcom five days to respond with guarantees. Broadcom declined, and so the CMA took the next step.
The merger “may be expected to result in a substantial lessening of competition” in the UK for goods and services, including Ethernet network-interface cards, fibre channel host-bus adapters, storage adapters, and fibre channel switches, the CMA said in its statement Wednesday.
In its report last week, the CMA expressed concern that the merger would hurt Broadcom’s server hardware competitors by reducing interoperability with VMware’s market-dominant server virtualization software or making it harder for competitors to get certification that their hardware is interoperable. Faced with interoperability concerns, most customers would switch to Broadcom hardware rather than switch from VMware software to a competitor.
Additionally, the CMA is concerned that Broadcom will gain access to commercially sensitive information from competitors seeking VMware interoperability certification. While gaining VMware certification, hardware providers submit product samples, product roadmaps, driver source code, and other technical details, which Broadcom might get access to. That might reduce Broadcom’s incentive to compete because it could develop its products to be only marginally better than its competitors’.
Also, Broadcom’s competitors may have a reduced incentive to innovate over concerns that Broadcom would steal the competitors’ ideas, the CMA said.
Meanwhile, in the US, the Federal Trade Commission FTC is “conducting its own in-depth review and could challenge the merger as well, which would further decrease the likelihood that the merger closes,” said LaComb, an associate for the law firm MoginRubin, an email to Silverlinings. LaComb wrote an article, “Broadcom Acquisition of VMware Unlikely to Close,” for the National Law Review, published Friday.
He told Silverlinings that Wednesday’s CMA decision was anticipated and doesn’t change his perspective.
Broadcom is unlikely to agree to structural remedies to address regulatory concerns, LaComb says. These remedies would require Broadcom to divest its server hardware segments. That divestment would eliminate significant revenue for Broadcom and “eradicate synergies from the merger, making the merger significantly less attractive,” LaComb says.
However, analysts were more optimistic that the deal will close.
“This is just the UK regulator playing the relevance game,” said Holger Mueller, VP and principal analyst at Constellation Research.
Patrick Moorhead, CEO and chief analyst at Moor Insights & Strategies, agreed.
“I expect this deal will happen this year and don't expect either party to back out,” he said. “The deal offered to VMware is a good one, and Broadcom is a better software and services company with it.”
He added, “I think Broadcom will have to make some commitments to support third-party NICs, but that's about it.”
For its part, VMware said in a statement: “Broadcom’s acquisition of VMware continues to move forward as expected, including with respect to the regulatory review process taking place in the UK and those across multiple other jurisdictions. VMware will continue to respond to all regulatory inquiries, as appropriate, and we continue to expect the deal to close in Broadcom’s fiscal year 2023.”
In addition to the UK and US FTC, the EU announced its own probe into the deal in December.